teg presentation utah 8-22-13 for web
DESCRIPTION
Henry Edmond's presentation at the summer conference for ESA of Utah on August 22, 2013TRANSCRIPT
Confidential Presentation prepared for Recipient’s use only. Not to be relied upon, forwarded or duplicated
without consent of The Edmonds Group, LLC.
Alarm Industry Valuations, Value Drivers and Pros and Cons of Holding vs. Selling Accounts
August 22, 2013
Summary
Introduction Valuation Drivers Valuations and Recent M&A Deals Holding vs. Selling Accounts and Capital
Markets Q&A
INTRODUCTION
Henry Edmonds
Over 28 years of capital markets experience Last 23 in the alarm industry
Started The Edmonds Group in 2004 Co-Founder (1990) and CEO of SLP Capital (thru 2004) Largest lender to alarm industry when sold to CapitalSource in 2004 Over $400M of alarm loans
Wall Street investment banker (1985-1990) $2B in transactions in the airline industry
MBA, Harvard Business School BS, with distinction, civil engineering, University of
Virginia
The Edmonds Group
Investment banking services Capital raising and mergers/acquisitions advisory
40+ transactions closed Average transaction size about $50 million Sweet spot $10 million to $300 million
$3.0+ billion transaction value Focused on security alarm industry Specialize in recurring revenue service businesses
Broad experience representing buyers, sellers, borrowers and capital providers
High level of client service
VALUATION DRIVERS
Key Valuation Metrics
At the highest level, everything can be reduced to four key metrics: Cash flow Attrition rate Growth rate/new account volume Creation cost Only affects valuation when selling a company
Dealers must have the ability to provide good data on these metrics if they are going to maximize value!
Key Valuation Metrics
Cash flow margin from existing customers Adjusted EBITDA and SSCF
Attrition rate Total lost RMR on a TTM or trailing 6 mo basis divided by average
RMR outstanding Canceled and change in over 90 days
Creation cost of new customers Total direct and indirect cost associated with new account creation,
less upfront revenue, divided by newly created RMR “Net Creation Cost” – before allocation of corp. overhead “Gross Creation Cost” – after allocating corp. overhead
Growth rate Not relevant in bulk account sale
Other Valuation Drivers
Size of transaction Company reputation Quality of account and financial data Credit score profile RMR per account/margin Volume of account generation Critical mass per market/geography Ease of reprogramming/line swing Bulk or company sales
Sales model for generating customers
Other Valuation Drivers (cont.)
Install quality/service call rates Contracts Term Organization
Scanned and original contracts
Contract form Automatic renewals, appropriate disclaimers
Billing profile ACH vs. credit card vs. invoice
Age of accounts Type of RMR (residential vs. commercial)
Types of Sale Transactions
Types of transaction matters Company sale Bulk accounts sale Ongoing dealer program sales
Valuation drivers vary depending transaction type Creation cost doesn’t matter in bulk or dealer program sales Credit scores less important in company sale with aged
account portfolio
Average Industry Metrics
Margins on existing customers Adjusted EBITDA of 50% to 65% for companies with scale Average 55%
Attrition rate 8% to 14% Average 12%
Growth rate 5% to 10% Average 8%
Creation cost Gross Creation Cost 25x to 35x Average 28.5x Net Creation cost 20x to 30x Average 25x
Valuation Ranges
Not every company or account base is created equal How does your company’s performance across key
metrics compare with others? If you have strong metrics, get a valuation at the high
end of the range Poor metrics, low valuation Large alarm companies trade at 10x to 13x SSCF Smaller companies trade at 30x to 50x RMR
VALUATIONS AND RECENT M&A DEALS
Liquidity/Secondary Market Activity
Active secondary market for buying/selling alarm companies and/or alarm contracts
Hundreds of transactions occur every year Entire companies Dealer programs Bulk account sales
Larger (more efficient) buyers get predictable and significant economies of scale by acquiring
Large transactions ($500k+ in RMR) trade on multiples of seller cash flow
Smaller transactions trade on buyer’s cash flow not seller’s Hence RMR multiples Still all about cash flow
Dealer Programs/Bulk Sales
Significant factor in the industry today Over 1 million accounts purchased each year Doesn’t include company acquisitions
Dealer program purchases Weekly or monthly closings Typically newly created accounts
Bulk sales Accounts only Aged accounts Usually one-off transaction Seller stays in business
Dealer Program Gross Multiples
Monthly Volume <100/mo. >100/mo. >200/mo. >300/mo.
Credit Score
Up to $50k/year
$50k to $100k/year
$100k to $150k/year
Over $150k/year
625-650 32x 33x 34x 35x 650-700 34x 35x 36x 37x 700+ 36x 37x 38x 39x Avg. Gross: 34.0x 35.0x 36.0x 37.0x Avg. Net: 30.6x 31.5x 32.4x 33.3x Assumes: Auto-Debit Three Year Agreement Actual cash to dealer typically 10% less based on holdback
Company/Bulk Sale Multiples
Source: Barnes Associates
36.1x
39.9x 40.2x
50.8x
31.1x 34.2x 34.7x
28.9x
20.0x
25.0x
30.0x
35.0x
40.0x
45.0x
50.0x
55.0x
Under $50K RMR $50-100K RMR $101K-500K RMR Over $500K RMR
Max & min yearly averages 2003-2012
Company/Bulk Sale Multiples
Source: Barnes Associates
34.1x 36.9x 37.2x
42.5x
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
35.0x
40.0x
45.0x
Under $50K RMR $50-100K RMR $101K-500K RMR Over $500K RMR
Averages for 2003-2012
Dealer Program vs. Bulk/Company Sale
Monthly Volume Dealer <100/mo. >100/mo. >200/mo. >300/mo.
Up to $50k/year
$50k to $100k/year
$100k to $150k/year
Over $150k/year
Avg. Mult. 34x 35x 36x 37x Company/ Bulk
Up to $50k/year
$50k to $100k
$101k to $500k
Over $500k
Avg. Mult. 34.1x 36.9x 37.2x 42.5x
Notes: Dealer and bulk sales typically have holdbacks (10%+) for account guarantees Company sales typically do not
Major M&A Transactions 2013 YTD
Buyer/ Investor
Acquired RMR (millions)
RMR multiple
SAFE Security Pinnacle (accounts)
$1.6 30’s
Central Security Group
SecureNet $.65 40’s
Goldman Sachs/The Beekman Group
NorthStar $1.0+ DND
ADT Security Services
Devcon International
$3.6 41x
Ascent Media Corporation
Security Networks
$8.8 58x
Major M&A Transactions 2012
Buyer/ Investor
Acquired RMR (millions)
RMR multiple
BV Investment Partners
DTT $1.5 60x
Interface Westec $1.7 32x Norwest Venture Partners
ACA $3.6 50x
Monitronics Pinnacle $4.4 30x Blackstone Group
Vivint $31.6 57x
Protection 1 Vintage Security ~$.40 DND
HOLDING VS. SELLING ACCOUNTS AND CAPITAL MARKETS
Advantages Disadvantages
Limited outside capital needs Cash up-front from buyer
No long term account performance risk
Limited infrastructure beyond sales Limited service, billing,
account retention requirements
Buyer has a lot of control Typically no capital
commitment Terms/availability can change
Holdbacks/ account guarantees
Not creating track record of servicing/retaining accounts
Little control of data and/or account performance
Selling Accounts / Dealer Program
Advantages Disadvantages
Control of accounts Who you sell to What products you sell What you charge How the customers are
serviced and treated
Building a brand Opportunity for much
higher multiple when eventually selling
Significant capital required
Responsible for long term customer performance
Need full infrastructure billing, collections,
servicing, retention
Holding Accounts
Debt Markets
Lots of experience alarm lenders However, most industry lenders require a minimum
deal size of $5 million to $10 million Local/regional banks will lend smaller amounts Lack of industry understanding – low advance rates
Advance rates for industry lenders not high enough to cover all cost of origination – some equity required Senior Debt lending 18-24x RMR Stretch Senior multiples 26-28x RMR Subordinated debt up to 30x RMR
Private Equity
Over 2,000 private equity firms in the US Firms come in all sizes Over $500 billion in money to spend
Many more PE firms interested in the alarm industry Industry performed well through 2008/2009 recession Viewed as safe harbor with good upside potential
However, require positive EBITDA and a certain size Most want EBITDA $1M+ Need to invest at least $2M+ Dealer probably needs to own at least $500k in RMR
Venture Capital and Public Markets
Venture capital firms invest in pre-cash flow and pre-revenue companies
Typically looking for companies that have a unique product or service and potential for exponential growth Not a fit for most alarm companies
Public markets well suited for alarm companies Few alarm companies big enough (very expensive to be public
company/need minimum market capitalization $500M+) Markets don’t really understand alarm industry accounting
Summary – Hold vs. Sell
Outside capital is hard to come by/expensive until a firm reaches a certain size/scale
Dealer programs/selling accounts are a great way to develop a track record Reinvest profits to build infrastructure
Transition through a hybrid approach Sell some accounts, hold the rest
Holding accounts/becoming a full service alarm company ultimately creates much more value
QUESTIONS AND ANSWERS
Contact Information
Henry Edmonds The Edmonds Group, LLC
16 Lenox Place St. Louis, MO 63108
Ph: 314.422.4649 Email: [email protected]
Website: www.theedmondsgroup.com Facebook: www.facebook.com/TheEdmondsGroup
Twitter: TheEdmondsGroup